intro to hft and algos

8/7/2019 Intro to HFT and Algos

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D E C E M B E R 6 T H , 2 0 1 0

THE TRADING PITT



WHAT IS AN ALGORITHM?

� A set of rules used to make a decision.

� Used in every type of mathematical application.

� As simple as buy above previous day high to ascomplicated as Volume Weighted Average Priceutilizing neural networks.

� Often many are not very complicated.



HIGH FREQUENCY TRADING



PURE ARBITRAGE

� American Depository Shares Arbitrage

� Convertible Bond Arbitrage

� Merger Arbitrage� FX Rate Arbitrage

� Across multiple markets

� FX Forward Arbitrage

� ´Negative Spreadsµ

� Put/Call Parity

� Option/Structured Product Mispricings



COLOCATION THE IMPORTANCE OF

SPEED

� Increasingly low latency technologies are important

� The closer you are to the main data centers themore

� NYSE colocation and other exchanges is often veryexpensive

� 300 Million Fiber Optic Project to connect New York and Chicago

� Milliseconds to turn into Microseconds

� In FX and Over-the-Counter markets you want to belocated close to main center

� Pittsburgh New York example



STRATEGIES AND GAMING

� http://www.cnbc.com/id/39664612/

� ´GAMINGµ is making the market appear to appear

to a trader as having a future expectation only to

trick the trader·s system to going off.

� The market is just full of people trying to game eachother·s system.

� When it come·s to broker·s it is illegal.

� Predatory Algorithms



STRATEGIES AND GAMING 2

1. Accumulation algo: Usually looks like an algo that buys/sells showing you holds on the bid/offer, accumulates, drops, gets people

short on the tape, rebids, etc. Usually identified in ranges/consolidation portions of a chart.

2. Distribution algo: Very similar to the one above. The one major difference is that there doesn¶t appear to be follow throu gh on the

moves. This tends to occur towards the end of extended moves. Often we get caug ht up trying to position for another leg that never

comes. The smart buying/selling has taken place two legs ago and this one is just showing you buying and selling. Again looks similar

to a range/consolidation in charts after extended moves.

3. Driving algo: The one that just blasts the bids/offers. Just needs to get the order in regardless of price seems like.

4. Market making (passive): aka. the GS algo. This one is very ridiculous. Probably the hardest one to identify. Hard to desc ribe but you

know it when you see it. Let me compile a few of these to see if i can get my point across. For the most part you can see equal number

of prints in size seconds and pennies apart from each transaction.

5. The big order stepping: self explanatory. Takes place in the form of a large order stepping up or holds on the bid/offer stepping

getting hit for size.

6. Big order broken down into little pieces: This is the one where you can tell there is buying in the market place hidden in all the 1-200

prints within a small range in price. Time and overall volume are the biggest factors in this one. Figured this one could be a subset of

the accumulation algo.

7. Buy to sell: The magic buyer on the bid to sell a more ridiculous amount on the offer. Seen often down trending stock s, stocks that

run up very quickly where you can tell it has to be a sell«

8. Sell to buy: the opposite of the one above

9. Buy the new low: the most annoying of all. I hope many of these got destroyed in the mini crash of may 6.10. Sell the new high: well again, what do you expect other than massive selling into the new high to punish the day traders who like to

blast the new highs. Looks like massive held offers at the new highs intraday on a stock followed by a severe/out of nowhere

exaggerated downtick by all of those who just got caught.

11. The re-bidder: a subset of the accumulation program. The program buys on the bid, gets hit, drops a bit, and rebids for similar

quantities.

12. The re-offerer: Similar to the one above.

13. The ultimate screw job: The headaches for most scalpers for size on the street. The big bid/offer where you lose buying/shorting in

front and then when you flip.

Algo List Referenced from a blog by SMB Capital.



PROGRAMMING AND LANGUAGES

� Concept Development often starts in Excel or MATLAB

� You will want to learn C++, C#, and in many cases

JAVA.

� Implementation through FIX is growing.

� R or S+ are also used.

� Depends on company position.

� Show Excel Sheet



SAMPLE CODE



WHY SHOULD I GET INVOLVEDWITH

ALGO TRADING

� Many quants and computer programmer·s never make good trader·s.

� Knowing programming as a trader is huge for a

large amount of firms.

� Growth in Proprietary Trading Firms has led to alarge technology revolution in the field.

� Firms look for Quantitative Skills (Engineers, Physics,

etc.)



RESOURCES

� Good links

intro to hft and algos

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